Bill Bonner introduces a new phase in economic history

We’re going to rename our theory. This is more than a depression; it’s more than a financial and economic phenomenon. It includes a shift of power... a return to normal after four centuries of aberration... and the failure of a whole line of Nobel Prizing-winning economic claptrap, including the Efficient Market Hypothesis and Modern Portfolio Theory.

Let’s call this phase The Great Correction... and wait for events to prove we’re right.

In the meantime... we wonder...

When will this bounce end? What will happen when it does?

Yesterday was another inconclusive, information-free day. The Dow rose 17 points. Gold went up $5. Oil fell to $79 a barrel.

But the deep trends continue. The government grows... and heads towards bankruptcy. Most developed nations are running huge deficits in their public accounts. The one that has been most in the news is Greece.

The Hellenes promised to cut their spending, rioted in the streets, and now hope for some back-up plan from Europe. The rest of the PIIGS (peripheral European states, with good food and wine, but bad finances) watch carefully. What Greece gets now they’re likely to get later.

But the problem is hardly limited to the small states of Europe.

Barron’s reports that the states face “massive shortfalls” in their pension programmes. This is in addition to the other massive shortfalls faced by governments all over the planet.

“US ratings threat” is the headline on today’s Financial Times:

“Moody’s Investor Service will warn the US today that unless it gets its public finances into better shape than the Obama administration projects there would be ‘downward pressure’ on its triple A credit rating.”

Moody’s learned a lesson last year. You take money from the ratee. You give a good rating to junk. Then, people point their fingers at you and sue when the junk goes bad. The raters don’t want every Treasury bond holder in the world at their throats.

The US is going broke; no doubt about it. Of course, it may take years...

What the hell? We can wait...

Some Treasury buyers aren’t waiting until the last minute. “China continues selling US Debt in January,” comes a report from the Wall Street Journal.

Japan too, adds Bloomberg.

Japan, of course, faces a financial crisis of its own. It already has government debt greater than 200% of GDP... and its aging citizens are saving less money each year. Pretty soon, it will be unable to finance its deficits. Then what?

Then, yields will rise and Japan will face a crisis similar to that of Greece.

And what about China? Even countries with sound budgets can take huge financial hits.

“China may face massive bank bailouts,” Bloomberg reports.

Yes, dear reader... China has a solid budget... and industries that make money. The trouble is, it has too many of them. And now it’s made the mistake of stimulating them to increase production – as well as increasing infrastructure – at the worst possible moment, just as their major customer goes into a funk.

So, while China’s state finances are in good shape – at least on the surface – its private sector finances are a mess. They are such a huge potential mess that one analyst refers to China as the “mother of black swans”.

Who’s going to bail out China’s banking sector? Who’s going to bail out Greece? Who’s going to bail out Japan? Who’s going to bail out the US?

Day by day, the lumbering, clumbering wheels roll on... towards bigger governments with greater debts...

One government looks to another one to help it out. The other looks to yet another. One nation depends on its central bank... and its central bank depends on the US Federal Reserve, the capo di tutti capi of all the world’s central banks.

*** This must be some kind of golden age for government. In the US, the feds have seized major stakes in banking, autos, insurance and mortgage finance industries.

The Chinese are paying for their enterprises. They already own footholds in some of the most important companies in the US.

Yesterday, they announced another big move. CNOOC, China’s state-owned energy company, is buying half of Argentina’s second-largest oil producer, Bridas. The Chinese have described the deal as giving them a “beachhead” for entry into Latin America.

*** The world’s richest people (two of the top five are Indians)... its biggest markets... its largest financial reserves... its most profitable companies – all are moving away from the US.

And now the Chinese are proposing to help the US upgrade its transportation system. Word from Beijing is that Chinese contractors are pitching high-speed rail lines to California, Florida and Illinois.

What next?

*** Empires you can trust...

At least there is one area in which the US maintains a clear and decisive lead – the military. Nobody comes close. No navy. No air force. No army.

We’re number one.

The trouble with being number one in military power is that you need to find a way to pay for it. Which brings to mind a recent book by Thomas F. Madden, ‘Empires of Trust’.

We spent the weekend sitting in a wicker chair by the pool reading it, drinking lime sodas and red wine.

The is a delightful history book, recounting Hannibal’s war against the Romans and the Romans’ many wars against the Greeks. It is a marvellous book of history. It’s too bad the author draws conclusions that are comically out of sync with his own tale.

The storyline is that the US, like ancient Rome, is a very different empire from most. It is a good empire... based on strong family and religious values... which wants only the best for the rest of the world and only peace and security for itself.

The Roman Empire succeeded, he says, because you could trust it. America will endure, he believes, for the same reason.

If this were true of Rome, it makes the Romans the most hopelessly incompetent race of humans that ever existed. They sought peace? The record shows a thousand years of wars; the history of Rome is a history of war. They fought the...

Sabines & various other tribes
Fidenates
Veientes
Albans
Latins
Samnites
Greeks
Carthaginians
Illyrians
Macedonians
Syracusians
Spartans
Doric Cretans
Argosians
Seleucids
The Aetolian League
The Ebro
Lusones
Various Celt-Iberian Tribes
Lusitani

This leaves out the small fry and only brings us up to 139BC...

They had another 500 years of hard fighting ahead of them. If there was anyone in the ancient world with whom the Romans didn’t kick up some dust, we have never heard of them.

And security? Mr Madden seems to think Roman armies went all the way from the banks of the Tiber to the banks of the Tyne, the Rhine and the Euphrates just so as to make the walls of Rome itself more secure. Having beaten one neighbour, they then faced another, who was naturally nervous about Rome’s next move.

As its circle moved outward, Rome found itself with more and more neighbors to defeat. Where once it had only a few potential enemies, it soon found itself ranged – albeit with allies of more-or-less questionable loyalty – against half the world, including against the world’s best military powers of time.

In the name of security, in other words, it put the ancient world’s leading military geniuses to work trying to destroy it.

Mr Madden really ought to get out more. He seems to know a lot about Roman history. The problem is that he knows not much about other people... their history... their motivations... and their empires.

While there are vast differences in character and the style of various empires, they all are alike in that they are all run by humans who are all after the same heady mix of power, money and status.

All use both carrot and stick – insofar as they can. Some were better with the carrot. Others were better with the stick. Using the carrot was often the cheapest way for an empire to get where it wanted to go.

But all empires were also capable of making and winning wars, often ruthlessly and cruelly, when the occasion called for it.

Ultimately, an empire is a protection racket. The imperial power provides protection and demands tribute in return. If he gets no tribute... or cannot provide protection... he is out of business. Trust is useful to empires, as it is to the Mafia; it is a tool, not the core business.

This is clear from Mr Madden’s own recounting of the Punic Wars.

After the Romans had conquered all of Italy, they looked across the straits of Messina at Sicily. There, the Carthaginians were trying to take control. Naturally, the Sicilians of the time looked for support wherever they might get it, and signalled to Rome that it could use help.

Trouble was, the Romans had an understanding with the Carthaginians. Like Hitler and Stalin before the invasion of Poland, the two had agreed to respect each other’s spheres of interest.

The Romans, who desired no conquest, according to Madden, had agreed to leave the rest of the world to the Carthaginians; the Romans got free run of Italy in return.

But the empire of trust betrayed Carthage; it went to war in Sicily and won the island for itself. This was the first Punic War.

The second came about as had the first; this time the Romans breached their agreement by meddling in Carthaginian affairs in Spain.

The Second Punic War saw Hannibal cross the Alps. Then, we got to see how strong those bonds of trust in Italy really were. Given the choice between weak Rome and the strong Carthaginians, dozens of Italian cities switched alliances – including the second-largest city on the peninsula, Capua.

The Romans could be trusted, as long as trust worked for them. When it didn’t, they turned to violence – just like everybody else. In the case of the Punic Wars, and all of Rome’s wars, it was violence that settled the issue, not trust.

Madden spends considerable ink telling us how nice the Romans were in their wars against the Greeks. But when push came to shove – that is, when trust no longer paid – Roman forces looted the treasures of Corinth and levelled the city.

Mr Madden misses the point about Rome. He misses the point about the US too.

Like Rome, America uses carrot and stick. Carrots are usually easier. But, in the end, it’s the stick that counts.

Americans were able to calm indigenous peoples with treaties and reservations. But if they had not been ready and willing to go to war against them, they would never have been able to colonise the continent.

Then, they used big sticks against their own people too. In their war against the Confederacy, Sherman did to Atlanta almost exactly what Mummius had done to Corinth. He destroyed the city... and laid waste to the countryside around it.

A brief dummy’s guide to empire: A coalition of the willing is all very well; but when they’re not willing to go along, get out the stick and whack them hard.

Until tomorrow,

Bill Bonner
For The Daily Reckoning

P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.

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